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All Danmarks Nationalbank´s publications

We explore the consistency at household-level between register-imputed and survey-based consumption figures for Denmark over the period 2002-15. We find that the marginal propensities to consume out of income estimated on the basis of register data are not significantly different to those estimated on the basis of survey data.

We develop a probability-of-default model for Danish corporate firms based on deep learning that employs the managements' statements and auditors' reports of the annual reports in addition to the numerical financial variables. Our results show that the text segments provide a statistically significant enhancement of the prediction accuracy compared to models that do not employ the text segments, in particular for large firms. Our results furthermore show that the auditors' reports contain more relevant information than the managements' statements.

This paper aims to test the microfoundations of consumption models and quantify the macro implications of heterogeneity in consumption behavior. We propose a new empirical method to estimate the sensitivity of consumption to permanent and transitory income shocks and apply it to administrative data from Denmark. We find that households who stand to lose from an interest rate hike are more sensitive to income shocks than those who stand to gain. This interest rate exposure channel is potentially more important than the standard intertemporal substitution channel.

We implement a regularly top-performing machine learning model and find that the added complexity in the model does not imply that the model is better at capturing correlation in corporate distresses compared to traditional distress models. Instead, we propose a frailty model, which allows for correlations in distresses. This model demonstrates competitive performance in terms of ranking firms by their riskiness, while providing accurate risk measures of a corporate loan portfolio.

Can monetary stimulus boost corporate investment? We answer this question by studying ECB's 2011-2012 Longer-Term Refinancing Operations (LTROs). While we find that the LTROs helped to decelerate the declined in Eurozone firms' investment our results also show that banks' use of LTRO funds is negatively associated with their clients' investment. Overall, the paper highlights the difficulty of boosting investment by injecting liquidity into the banking system.

In this paper I study the business cycle dynamics of the maturity structure of the debt of U.S. non-financial firms. To account for the documented facts, I construct a quantitative dynamic equilibrium model in which firms optimally choose their debt maturity structure. The model can match stylized facts about the level and dynamics of the maturity structure of debt, both in the aggregate and along the firm size distribution.

The paper analyses the effectiveness of fiscal tools at the zero lower bound (ZLB) in a non-linear New Keynesian DSGE model. Although the government spending multiplier increases at the ZLB, its size depends strongly on rational expectations to the liquidity trap length. In light of this finding, market expectations in the beginning of 2009 might indicate that expectations to the American Recovery and Reinvestment Act were too optimistic.

We analyze the costs and benefits of increasing capital requirements for Danish banks. Costs are low if banks suspend dividend payments for two years and if investors' required return falls as banks accumulate new capital. An increase of required capital ratio from its current level reduces the probability of financial crises and the long-lasting output costs associated with these. Based on Danish data and using models for the Danish economy, we thus confirm findings in studies for other economies: The benefits outweigh the social costs of increasing capital ratios.

Credit institutions are to an increasing extent using Contingent Convertible Bonds, CoCos, to meet part of their capital requirements. This paper provides a thorough introduction to CoCos – the product, its use in capital regulation, the market and the specific risks faced by investors. A variety of models illustrate how the complexity of CoCos makes them difficult to use when assessing the soundness of the issuer; in addition to this, the many CoCo specific risks make it questionable whether the cost of CoCos constitutes a lower bound for the cost of equity.

In this paper, we investigate the geographical connection of the housing market. We estimate a regional model of single-family house prices and show that regions are connected via the relative prices, giving rise to a ripple effect – when house prices increase in one area, part of the housing demand is shifted to other areas. At the same time, we find that house prices are more sensitive to the development of fundamental factors, such as income and interest rates in Copenhagen, and that the ripple effect is stronger from Copenhagen to the rest of Denmark than in the opposite direction.

This paper addresses three types of geographical decoupling in foreign direct investment (FDI), i.e., challenges when using traditional FDI data as a proxy for real economic integration between economies: (i) large bilateral asymmetries between inward and outward FDI, (ii) the role of special purpose entities (SPEs), and (iii) the effect of moving from immediate counterpart economy to ultimate investing economy (UIE). A unique global FDI network is estimated, where SPEs are removed and FDI positions are broken down by the UIE.

We study the impact of the ECB's large scale asset purchase programme on selected euro area and neighbouring countries with a particular focus on the role of the exchange rate regime. The effects of the programme are assessed by conducting an event study as well as by estimating a structural VAR model using a shadow short rate as a measure of the monetary policy stance. We find that the programme has contributed to reducing longer-term bond yields in the euro area as well as in neighbouring countries.

Time-to-maturity is introduced alongside leverage and asset volatility to explain equity volatility. The time-to-maturity can be interpreted as investors' views on when the firm will be liquidated and thereby relates to their view on the funding and solvency situation of the bank. Results for large European banks indicate that changes to the perceived time-to-maturity can indeed partly explain changes in observed equity volatility.

In this paper we study what financial cycles are, what they look like in Denmark, and what their relationship is with the real economy. We show that medium term swings in house prices and credit should be used as an illustration of the financial cycle in Denmark.

The emergence of a house-price bubble can have sizeable implications for macroeconomic as well as financial stability. This paper investigates the dynamics of house prices in Denmark in order to identify emerging bubbles in due time. The empirical results identify developments in line with a price bubble from mid-2005 in Denmark. When applied to flats in Copenhagen, real price developments in 2015-16 indicate speculative behaviour but it cannot be ruled out that developments are driven by fundamental economic factors.

What are the effects of introducing interest-only, flexible-rate mortgage contracts and a tax-freeze on housing wealth for the real- and financial economy? I study this within a medium-size DSGE-model with housing, banking and financial frictions, and the coexistence of flexible, fixed rate and interest-only mortgage contracts. I find that the introduction and the adaptation of flexible rate and interest-only mortgage contracts together with a freeze of taxation of the housing wealth can explain around 1/3 of the real house price gap in Denmark during the period 2004-06 and 15-40 per cent of the output gap. The household debt-to-GDP would have been almost constant instead of increasing by 20 percentage points. Finally, the analysis points to a more volatile economy after the implementation of the structural changes to the economy.

This paper explores the significance of overoptimism on house price developments in Denmark. The results indicate that house price developments historically have been partly driven by sentiments decoupled from underlying economic fundamentals, especially during strong house price booms.

The financial crisis has moved attention to the modeling of financial frictions and banks in DSGE models. The preceding housing boom put focus on the need to incorporate developments in the residential sector, including house prices. This paper documents an estimated DSGE model of the Danish economy with financial frictions, banking and a construction sector.

Using firm-level data from surveys and financial statements, this paper presents an analysis of credit standards, capital allocation and financial conditions of non-financial enterprises in Denmark since the beginning of the financial crisis. The analysis indicates that low interest rates and increased competition among financial intermediaries have not lead to significant easing of credit standards for the least creditworthy firms. The current credit standards to a large extent still contribute to allocating loan capital to the most solvent and productive firms. Furthermore, the analysis indicates that Danish firms' credit demand is relatively limited, and that they have relatively good access to finance in comparison with firms in other countries.

We model the dynamics of Danish government bond yields in a low-rate environment using a shadow-rate term structure model, which imposes a lower bound on the yields. In contrast to findings in the literature for other countries, we do not observe notable improvements when applying a shadow-rate model to the Danish case, as the model is challenged by the declining trend of the Danish rates into negative territory.

The market-based SRISK measure introduced in Brownlees and Engle (2015) is used to measure the level of systemic risk in Danish banks for the period 2005-15. We find that SRISK was a very good predictor of which banks that needed public capital injections during the financial crisis of 2007-09. According to SRISK, the Danish financial sector is well-capitalized as of end-2015.

Flexibility in the labour market is important for macroeconomic stability. The Danish labour market has been highlighted as being flexible, which this study confirms using micro data from 1980 to the present.

Central banks around the world have substantial domestic and foreign financial assets and liabilities on their balance sheets reflecting their role as monetary authorities. This paper explores the long-term trends in risk and return in central banking using the central bank of Denmark, Danmarks Nationalbank, as a case study.

A final product is created through a chain of activities that add value to the product. We analyse the importance of global value chains for Danish trade and employment. We track through which industries Danish value added is exported and where it is finally consumed. We are furthermore able to link Danish employment to final consumption in partner countries.

Measuring the effect of an unanticipated reduction in tax credits on pension savings, this paper shows that individuals tend to make extraordinary repayments on their debt when saving in retirement accounts becomes less attractive. We conclude that tax-favoured retirement accounts could affect gross debt accumulation.

Market liquidity has received a lot of attention lately, especially in fixed-income markets. This paper studies the determinants of market liquidity in a theoretical model for market making with inventory costs, which is extended to the case of fixed-income securities.

The paper analyses how savings behaviour and leverage of Danish households vary across interest and amortisation profiles on mortgage loans. The analysis shows that households choosing interest only-mortgages have lower savings rates, take larger loans and have higher loan to value-ratios than households which amortise their mortgage debt.

Private investment in advanced economies contracted sharply during the most recent financial crisis. Using firm-level data from Denmark, this paper argues that the high leverage, which was build up by some firms before the crisis, contributed to the reduction in investment during the crisis, in particular for small and medium-sized enterprises...

​Unemployment insurance schemes often include conditions on past employment history as part of the eligibility conditions. In a theoretical model the authors show that benefit duration and employment requirements are substitute instruments...

Working paper: This paper discusses the natural real rate, why and how it reflects the stance of monetary policy, and what can happen if it turns negative; make monetary policy ineffective, which in a situation with a negative output gap can lead to a long period of low growth - secular stagnation. Denmark as a fixed exchange rate regime vís-a-vís the euro and consequently has tied its policy rate to the policy rate in the euro zone. But it can still be interesting to analyse the stance of monetary policy and use it as input in policy recommendations for fiscal policy and other economic policies. Using this as motivation, the natural real rate is estimated using Danish data...

We use a standard sticky-price model to provide evidence on three mechanisms that can reconcile somewhat frequent price changes with large and persistent real effects of monetary shocks. To that end, we estimate a semi-structural model for the U.S. economy that allows for varying degrees of real rigidities, and cross-sectional heterogeneity in price stickiness. The model can extract some information about these two features of the economy from aggregate data, and discriminate between different distributions of price stickiness. Hence it can also speak to the debate about the role of sales and other temporary price changes in shaping the effects of monetary policy. Employing a Bayesian approach, we combine macroeconomic time-series data with information about empirical distributions of price stickiness derived from micro price data for the U.S. economy. Our estimates point to the presence of both large real rigidities and an important degree of heterogeneity in price stickiness. Moreover, cross-sectional distributions of price stickiness that factor out sales improve the empirical fit of the model. Our results suggest that bridging the gap between micro and macro evidence on nominal price rigidity may require the combination of several mechanisms.

In Denmark, there is a long-standing tradition for estimating the stock of national wealth. However, the most recent estimate is from 1985 and the longest time series available covers only the period 1950-1978. In this paper, we review the earlier estimates and present new annual time series estimates on the stock of national wealth in Denmark 1845-2013 based on a broad range of contemporary and historical statistics as well as results from previous academic research.

We take a closer look at the links between corporate capital structure and productivity, profitability and access to finance based on Danish industry-level and firm-level accounting data from the period 2000-2011. Our results indicate that the capital structure has no significant impact on the firms' profitability or productivity. However, the capital structure is important in relation to the range of financing options available to the firm and its funding and refinancing risks. Our analysis shows that small and medium-sized enterprises with high solvency ratios tend to have a higher acceptance rate when they apply for bank loans than corresponding firms with low solvency ratios. We also find that firms issuing exchange-traded stocks have higher solvency ratios than unquoted public firms. Finally we compare the corporate capital structure in Denmark with other EU countries based on aggregated financial accounts statistics. The overall funding pattern of Danish firms is quite similar to the one found in the other European countries. However, the Danish firms tend to a somewhat lesser extent to use market based funding such as quoted shares and corporate bonds which might reflect a large and well-functioning Danish market for mortgage bonds and the prevalence of industry foundations in Denmark.

In this paper we study fiscal policy in Denmark in the period 2004-2012 and compare the actual policy to counterfactual, rule-based alternatives. Given Denmark's fixed exchange rate towards the euro, it is the job of fiscal policymakers to stabilise fluctuations in output and inflation. However, we find that fiscal policy had the 'wrong sign' in the years leading up to the recent crisis, i.e. that fiscal policy contributed positively to the output gap when a contractionary policy was called for. In fact, our rule-based approach to fiscal policy would have prescribed a very substantial fiscal tightening by as much as 1.5 pct. of GDP in each of the years 2006-08. Furthermore, we show that even based on real-time data, which significantly underestimated the ongoing boom during those years, a substantial tightening of fiscal policy was called for. A tighter fiscal policy during the boom years would have helped Denmark avoid a large loss of competitiveness, thereby dampening and shortening the subsequent economic crisis in Denmark significantly, and could have made room for greater fiscal expansions during the crisis if desired.

We use data for nearly 800,000 Danish families to examine whether high household leverage prior to the financial crisis may have amplified the reduction in household spending over the course of the crisis. We find a strong negative correlation between pre-crisis leverage and the change in non-housing consumption during the crisis, conditional on a range of other household characteristics. The larger drop in spending among the highly leveraged families reflects that these families consumed a larger fraction of their income than their less-leveraged peers prior to the crisis. But as the crisis unfolded, this difference in consumption levels between high- and low leverage families vanished. Moreover, we find suggestive evidence that the drop in consumption for the highly leveraged families cannot be fully explained by a contraction in credit supply.

Estimated DSGE models have become the standard workhorse model for empirically based macroeconomic analysis in recent years. In this paper, we present an estimated DSGE model for Denmark. The model has been estimated using Bayesian methods and a dataset consisting of 23 macroeconomic variables. We use the model to identify the most important determinants of business cycle fluctuations in Denmark. Our results indicate that foreign shocks explain more than 50 pct. of the variation in Danish real GDP. ...

This paper analyses the development in relative efficiency of Danish banks in the period 2001-2012. Using Data Envelopment Analysis (DEA) and Stochastic Frontier Analysis (SFA) techniques, we find that mean relative efficiency increased during the expansive period 2003-2007, while it decreased during the crisis years 2008-2010. During the recent years, mean relative efficiency increased again, possibly as a result of adjustment of inputs to the reduced output growth as well as the general consolidation in the banking sector. Furthermore, we find a considerable but not perfect correlation between efficiency rankings of banks as estimated by DEA and SFA. Finally, an international benchmarking exercise using data from 203 European banks and banking groups in 2012 shows that larger Danish banks and banking groups, when compared to their peers in other European countries, are distributed largely along most of the spectrum of efficiency.

Several Danish small and medium-sized banks have become distressed during and after the global financial crisis. In this paper, a multiple logistic regression model is used to identify which factors characterize the distressed Danish banks from 2008-12. The factors are chosen from a broad range of variables, i.e. the model is unrestricted. The estimated model identifies the distressed banks fairly well. The variables that altogether best describe the probability of a bank becoming distressed are: a bank’s excess capital in per cent of risk weighted assets, the 3 year average lending growth lagged 2 years, property exposure, and a benchmark for stable funding (the so-called funding-ratio). The variables are all adjusted with the sector average to account for the general development during the period.Based on experiences from this and past crises the Danish FSA introduced the so-called "Supervisory Diamond" as part of its banking supervision in 2010. A multiple logistic regression model is estimated with deviations from limit values set in the supervisory diamond to assess whether the variables in the supervisory diamond differ from the unrestricted model. Overall, the analyses support the establishment of benchmarks. The results of this analysis show that deviations from the benchmarks concerning property exposure and funding-ratio are statistically significant with expected signs. However, deviations from the benchmarks concerning lending growth, large exposures, and excess liquidity cover are statistically insignificant.

We offer a closer look at the frequency distribution of nominal price changes in the foreign exchange markets for a sample of 10 European exchange-rate pairs on the basis of a unique quarterly data set spanning 273 years. Our analysis clearly illustrates the risk of seriously underestimating the probability and magnitude of tail events when frequency distributions of nominal exchange-rate changes are derived on the basis of fairly short data samples...

We offer micro-econometric evidence on the relationship between the banks' loan rejection rates and the creditworthiness of the banks' corporate customers in 2007 and 2009/10 based on a unique Danish firm- and bank-level dataset. We find lower acceptance rates for applications for bank loans from firms with weak economic performance than for firms with strong economic performance. This was the case both prior to but especially during the financial crisis in 2009/10, where firms with higher profit ratios, solvency ratios and liquidity ratios had a significantly higher probability of having their loan application accepted than firms with poor economic performance. The banks tightened their credit standards during the financial crisis. However, banks with low capital adequacy ratios during the crisis did not have lower loan acceptance rates than banks with high capital adequacy ratios. This indicates that it has not been the banks' own capitalisation, which has been the decisive factor for the decline in the banks' loan acceptance rates during the financial crisis but rather the deterioration of the credit quality of the banks' corporate customers, which made it necessary for prudent banks to tighten their credit standards.

We present findings on the secondary market liquidity of government and covered bonds in Denmark before, during and after the 2008 financial crisis. The analysis focuses on wholesale trading in the two markets and is based on a complete transaction level dataset covering November 2007 until end 2011. Overall, our findings suggest that Danish benchmark covered bonds by and large are as liquid as Danish government bonds – including in periods of market stress. Before the financial crisis of 2008, government bonds were slightly more liquid than covered bonds. During the crisis, trading continued in both markets but the government bond market experienced a brief but pronounced decline in market liquidity while liquidity in the covered bond market was more robust – partly reflective of a number of events as well as policy measures introduced in the autumn of 2008. After the crisis, liquidity in the government bond market quickly rebounded and government bonds again became slightly more liquid than covered bonds.

This paper analyses the role of bank-specific and business cycle factors in explaining the development of credit standards and loan volumes of the larger Danish banks during the recent financial crisis. The analysis is based on a unique panel data set combining the individual answers from the Danish Bank Lending Survey with bank characteristics such as loan volumes and prices. We find that business cycle variables and the financial soundness of the individual bank are important factors in explaining its credit standards. We also find that credit standards and credit demand play complementary roles for loan developments at the individual bank level. Throughout most of the study period, shocks to credit demand are significantly related to growth in lending. Changes in credit standards have mainly played a role after the collapse of Lehmann Brothers in early 2009, and during the peak of the sovereign debt crisis in late 2011 and early 2012.

We study the empirical effects of fiscal policy in Denmark since the adoption of a fixed exchange rate policy in 1982. We demonstrate that fiscal stimulus has a rather large impact on economic activity in the very short run, with a government spending multiplier of 1.3 on impact in our preferred specification. Denmark's fixed exchange rate implies that the nominal interest rate remains fixed after a fiscal expansion, facilitating a substantial impact of the fiscal stimulus on the real economy. On the other hand, the large degree of openness of the Danish economy means that a sizeable share of the fiscal stimulus will be directed towards imported goods. Our results suggest that the 'monetary accommodation channel' dominates the 'leakage effect'. We also find that the effects of fiscal stimulus are very short-lived in Denmark, with the effect on output becoming insignificant after around a year. The fiscal multiplier is above 1 only in the first quarter, and drops to 0.6 one year after the shock. We further demonstrate that the fiscal multiplier is far from constant over time. While the multiplier was below 1 in the 1970's and 1980's, it has been above 1 in the 1990's and the 2000's, when Denmark has had a credibly fixed exchange rate and sound public finances.

We examine the real effects of credit-supply shocks using a series of structural vector autoregressive models estimated on the basis on a new quarterly data set for Denmark spanning the past 90 years or so. We find no effects on the unemployment level from supply-shocks to credit from commercial/savings banks in the periods 1922-1949 and 1981-2011 even though these periods contained several cases of severe banking and financial crises. Furthermore, credit-supply shocks do not seem to explain any significant share of the volatility in the unemployment rate during these periods. We attribute these findings to the large market for mortgage-credit loans in Denmark raised through bond-financed mortgage banks combined with comprehensive government interventions to safeguard financial stability during times of crises. There might, however, be indications of real effects from credit-supply shocks in the period 1950-1980 where credit rationing and exchange controls served as important economic-policy instruments. Overall these results indicate that both the financial-system structure as well as the extent of government intervention during banking crises play a key role to the significance of real effects of credit-supply shocks. These findings must be kept in mind when modelling the role of financial intermediaries in macroeconomic models.

In the aftermath of the financial crisis, it has been argued that a guideline for future policy should be to take the 'a' out of 'asymmetry' in the way monetary policy deals with asset price movements. Recent empirical evidence has suggested that the Federal Reserve may have followed an asymmetric policy towards the stock market in the pre-crisis period. The present paper studies the effects of such a policy in a DSGE model. The asymmetric policy rule introduces an important non-linearity into the model: Booms in output and inflation will tend to be amplified, while recessions will be dampened. I further investigate to what extent an asymmetric stock price reaction could be motivated by the desire of policymakers to correct for inherent asymmetries in the way stock price movements affect the macroeconomy.

Compared with the previous decades the rate of wage increase in Denmark has been subdued since the mid-1990s, given the pressure that gradually arose in the labour market. The paper describes changes in the labour market in recent years, including labour-market reforms and decentralisation of wage formation, and an empirical analysis of wage development in Denmark from 1975 to 2007 is performed. The results indicate that in the long term Danish wage development can be described by a real-wage curve. In the short term a wage equation with error correction towards this real-wage curve seems to outperform a simple Phillips curve.

Yes. Existing studies of the possible role of asset prices in monetary policy implicitly assume that central banks respond to asset price movements in a fully symmetric way. This paper offers a new perspective by allowing for different policy reactions to stock price increases and decreases, respectively. To avoid endogeneity problems, I employ the method of identification through heteroskedasticity. I then demonstrate that the reaction of the Federal Reserve has indeed been asymmetric during the period 1998-2008. While a 5% drop in the S&P 500 index is shown to increase the probability of a 25 basis point interest rate cut by 1/3, no significant reaction to stock price increases can be identified.

In Denmark the most frequent means of payment are cash and dankort. A survey study of Danish payment behaviour reveals that older citizens as well as low-income groups in particular prefer cash. A recent change in Danish surcharge regulation permits retailers to charge a fee when receiving credit card payments, but not when receiving debit card, including dankort, payments. A statistical analysis of Danish payment patterns indicate that such a change will not incite more people to pay in cash.

Utilising a unique data set with annual accounts from around 37,000 Danish non-financial firms spanning one and a half decade or so, we offer microeconometric evidence on bank-firm relationships and the performance of non-financial firms during the financial crisis 2008-09. Two major conclusions are drawn from the analysis. First, the probability of default during the financial crisis 2008-09 was significantly higher for firms with a “weak” bank than for comparable firms with a “sound” bank. Second, non-defaulting firms with a “weak” bank did not have a lower return on assets during the financial crisis 2008-09 than comparable firms with a “sound” bank. Taken together, these results may indicate the presence of heterogeneous effects of having a "weak" bank with significant negative effects on the economic performance for some firms but insignificant effects for the broad mass of firms.

This paper is unique in testing the importance of the foreign ownership definition when estimating productivity spillovers from foreign direct investment (FDI) to domestic firms; a crucial aspect in countries with a widespread use of holding companies. In addition, it moves beyond the standard framework by not only analyzing aggregate productivity spillovers, but also testing the importance of both domestic firm characteristics and FDI characteristics. The empirical analysis is the first one to exploit the rich details offered by official Danish firm-level panel data. The analysis displays significant evidence of negative spillovers at the aggregate level, but the results differ widely across industries. It also reveals that not including firms under indirect foreign control in the group of foreign firms, as is done in some studies, leads to biased results. With regard to domestic firm characteristics, high export orientation and high competition mitigate some of the negative productivity spillovers. Finally, the estimations showthat the negative spillovers largely stem from foreign firms (i) with low productivity, (ii) with high foreign trade orientation, and (iii) ultimately controlled by investors outside Scandinavia.

In Denmark official quarterly national accounts are only available for the period since 1977. The paper constructs a set of summary non-seasonally adjusted quarterly national accounts for Denmark for 1948-2010 in current and constant prices as well as a set of other key quarterly macroeconomic indicators covering the Danish economy since 1948. As a first exploratory analysis of these two new data sets the paper reviews some of the stylised empirical evidence on the business cycle, the monetary transmission mechanism and shocks to financial stability that can be uncovered using filtering techniques and reduced-form vector autoregressive (VAR) models. The long-span data sets make it possible to estimate VAR models of a higher dimension than is usually found in the literature due to degrees-of-freedom problems. The results from the VAR analysis indicate a significant and long-lasting negative impact on real GDP following an exogenous shock to the banking sector’s write-down ratio.

In Denmark official quarterly national accounts are only available for the period since 1977. The paper constructs a set of summary non-seasonally adjusted quarterly national accounts for Denmark for 1948-2010 in current and constant prices as well as a set of other key quarterly macroeconomic indicators covering the Danish economy since 1948. As a first exploratory analysis of these two new data sets the paper reviews some of the stylised empirical evidence on the business cycle, the monetary transmission mechanism and shocks to financial stability that can be uncovered using filtering techniques and reduced-form vector autoregressive (VAR) models. The long-span data sets make it possible to estimate VAR models of a higher dimension than is usually found in the literature due to degrees-of-freedom problems. The results from the VAR analysis indicate a significant and long-lasting negative impact on real GDP following an exogenous shock to the banking sector’s write-down...

We present preliminary findings on the liquidity of the government and covered bond markets in Denmark before, during and after the 2008 financial crisis. The analysis focuses on wholesale trading in benchmark bonds in the two markets and is based on an up to now unused transaction level dataset for the period from January 2005 until May 2010. We find that even though trading continued during the crisis, both markets experienced substantial declines in liquidity and significantly increased liquidity risk. Overall, our findings suggest that Danish benchmark covered bonds by and large are as liquid as Danish government bonds during periods of market stress. The findings also suggest that before the crisis government bonds were slightly more liquid than covered bonds in both the short- and long-term market segments. For the period after the crisis, the two markets appear to have had more or less the same level of liquidity for short-term as well as long-term bonds.

This paper presents estimates based on individual data of downward nominal and real wage rigidities for thirteen sectors in Belgium, Denmark, Spain and Portugal. Our methodology follows the approach recently developed for the International Wage Flexibility Project, whereby resistance to nominal and real wage cuts is measured through departures of observed individual wage change histograms from an estimated counterfactual wage change distribution that would have prevailed in the absence of rigidity. We evaluate the role of worker and firm characteristics in shaping wage rigidities. We also confront our estimates of wage rigidities to structural features of the labour markets studied, such as the wage bargaining level, variable pay policy and the degree of product market competition. We find that the use of firm-level collective agreements in countries with rather centralized wage formation reduces the degree of real wage rigidity. This finding suggests that some degree of decentralization within highly centralized countries allows firms to adjust wages downwards, when business conditions turn bad.

The working paper investigates the relationship between export performance and wage competitiveness in the manufacturing sector. Analysesin the paper show that among industrialised countries for the period since 1995 countries with the greatest deterioration in wage competitiveness have also had a tendency to do relatively poorly in the export market measured in volumes. Data for Denmark show that our loss of export market shares in volumes has been particularly high in timeswhen the Danish labour costs have risen significantly more than abroad. When looking at current prices, the link between export performance and wage competitiveness in the Danish manufacturing sector is less clear. This applies to both the Danish manufactured exports in total, and to industrial sectors. An empirical analysis based on data across countries, industrial sectors and time shows that the Danish manufactured exports are less sensitive to changes in wage competitiveness than that of our main trading partners Germany, Sweden and United Kingdom.

The paper examines whether electronic payments by card (Dankort) provides a useful indicator for retail sales in Denmark. Dankort transactions data is availableabout one week after the reference month, while the retail sales index is only published about three weeks later. We add to previous work by setting up a modelfor the seasonally adjusted volume index for retail sales. The extensions considered are meant to further enhance the usefulness of the nowcasting modelfor conjunctural analysis. The out-of-sample forecasting ability of the model compares favourably with a benchmark autoregression.

Late and significant revisions are often observed in direct investment equity income, hampering the quality of preliminary balance of payments statistics. We test a range of models and find that forecasts for direct investment equity income based on a combination of past profitability and consensus data for changes in expected private consumption growth outperform the current forecasts solely based on historical profitability. When the refined models are applied to the Danish balance of payments, the largest improvements are observed for outward and inward direct investment separately. Revisions on net direct investment equity income only decrease marginally because the significant revisions in gross terms resulting from the historical models have a tendency to (partly) cancel out each other on a net basis.

We estimate a multi-sector sticky-price model for the U.S. economy in which the degree of price stickiness is allowed to vary across sectors. For this purpose, we use a specification that allows us to extract information about the underlying cross-sectional distribution from aggregate data. Identification is possible because sectors play different roles in determining the response of aggregate variables to shocks at different frequencies: sectors where prices are more sticky are relatively more important in determining the low-frequency response. Estimating the model using only aggregate data on nominal and real output, we find that the inferred distribution of price stickiness is strikingly similar to the empirical distribution constructed from the recent microeconomic evidence on price setting in the U.S. economy.We also provide macro-based estimates of the underlying distribution for ten other countries. Finally, we explore our Bayesian approach to combine the aggregate time-series data with the microeconomic information on the distribution of price rigidity. Our results show that allowing for this type of heterogeneity is critically important to understanding the joint dynamics of output and prices, and it constitutes a step toward reconciling the extent of nominal price rigidity implied by aggregate data with the evidence from price micro data.

The mobile phone can now be used as a payment instrument to purchase goods and services. Several factors have supported this use of mobile phones. Firstly, the mobile phone has a market penetration close to 100 per cent. Secondly, technological developments have enabled new payment services to mobile phones and expanded the range of goods and services that can be purchased by means of a mobile phone. Thirdly, payments made by mobile phones – known as mobile payments – are in many contexts a more simple and faster way of making payments than other payment methods. The volume of mobile payments is still relatively limited in Denmark. However, pilot projects have shown that consumers are willing to use their mobile phones for payments. Yet, Denmark is still lagging behind several countries when it comes to mobile payments. This applies especially to the so-called proximity payments where the mobile phone is used instead of cash and/or payment cards for point of sales transactions.

Danish non-financial corporations to a large extent finance their non-financial investments internally. During a business cycle expansion the analysis indicates, that corporations firstly finance themselves internally. Hereafter more expensive external financing is applied. The costs of equity financing are normally higher than debt financing. However, for listed companies the results are consistent with a pattern where equity financing precede debt financing during an economic expansion. This is related to the fact that the cost of equity financing tend to fall at times of a rising stock market as it is typically the case already in the early phase of an expansion. Non-financial corporations normally increase short-term borrowing outside the banks in the early phase of an economic downturn. (Only in Danish)

Central banks analyse issues concerning retail payments – or just payments – to be able to promote optimal means of payment. Over the years, electronic payments – i.e. payments initiated and settled electronically – have gradually replaced manual paper-based payments on the grounds of convenience, security and efficiency. Moreover, payments become more efficient when services are offered to customers both before and after payment. These so-called value-added services (VAS) are fully electronic services such as e-invoicing and e-reconciliation, which bringtime and cost-savings for all participants, as paper-based services and manual work are replaced. In this paper we prove a clear-cut distinction between electronic payment products (e-payments) and VAS. We use the so-called Single Euro Payments Area (SEPA) project as a case study and discuss its current state of fatigue. Based on practical experience in Europewe conclude that the SEPA fatigue can be overcome by real-time settlement for payments and VAS supporting end-to-end (e2e)straight-through processing (STP).

The paper presents a consumer price index for Denmark 1502-2007. For the post-1815 period the index is based on existing CPI figures whereas new data has been constructed for the pre-1815 period. For the earliest years 1502-1712 the new CPI covers only the price of corn, whereas the period 1712-1800 is based on the comprehensive price material collected in relation to the recently completed Danish Price History Project. If one define price stability as an inflation rate around 2 per cent per annum, or lower, the past five centuries in Denmark has been dominated by price stability. Disregarding actual war periods there seems only to have been one major exception from the overall picture of price stability: The first four decades following the end of the Second World War where inflation expectations lost their anchor.

This paper presents the first topological analysis of Danish money market flows. We analyze the structure of two networks with different types of transactions. The first network is the money market network, which is driven by banks' behaviour on the interbank market, the second is the network of customer driven transactions, which is driven by banks' customers' transactions demand. We show that the structure of these networks differ. This paper adds to the new and growing literature on network topological analysis of payment systems.

This paper sets out by looking at the purchasing power parity theory applied on Denmark, using real effective exchange rate measures published by Danmarks Nationalbank. Following this, two commonly used methods of determining equilibrium exchange rates are examined. First, a model of time-varying equilibrium exchange rates is explored, whereby the development of real effective exchange rates is sought explained by a number of variables. Secondly, the so-called macroeconomic balance approach, which has often been used by the IMF, is examined.Overall, it is found that the real effective exchange rate for Denmark is not far from equilibrium, even though the real effective exchange rate of the krone has strengthened over the past 25 years. (only in Danish).

Several countries at the core of the Euro area have experienced coincident business cycles during the most recent decades, while the Danish economy seemed detached from these cycles during the 1980's and part of the 1990's. To a large degree, the decoupling of the Danish economy reflects fundamental changes in the Danish economic policy during this period. Towards the end of the 1990's are markable business-cycle convergence occurred between most of the industrialised countries, as documented in a series of empirical analyses. In the same period, the correlation between Danish and Euro area business cycles increased markedly. Over the most recent years, however, this global convergence has decreased again, while the correlation between Euro-area core economies has remained high. The Danish economy has also maintained a relatively highbusiness-cycle correlation with the Euro-area core countries. (only in Danish)

From 2001 the fiscal policy in Chile has been based on a structural surplus rule. Underthis rule, the government is committing itself to maintain its expenditures equal to thestructural revenue minus the target for the structural surplus, which is expressed interms of the GDP. The calculation of the structural balance depends on trend output, thelong-run copper price and the structural income from Codelco’s molybdenum sale.While the latter is calculated with a reference price determined as the average of pastprices, panels of independent experts, who meet once a year, determine the two former.The fact that independent experts have substantial influence on the fiscal budget makesthe Chilean fiscal rule different from similar rules applied in other countries.

In this paper we show that empirically plausible results on the effects of Fscal shocks in Galí, López-Salido and Vallés (2007) rely on a high degree of price stickiness and a large percentage of financially constrained agents. Real rigidities in the form of habit persistence, fixed firm-specific capital and Kimball demand curves interact in interesting ways with nominal and financial rigidities and allow us to reproduce the same consumption multiplier as Galí et al. (2007) under only two and a half quarters of price stickiness, instead of four, and only 30 per cent of constrained agents instead of 50 per cent. Therefore, real rigidities are useful in the study of fiscal shocks in addition to monetary and productivity shocks as has been shown in the previous literature.

In this paper, we perform a robust analysis of the determinants of US swap spreads using a wide range of theoretically motivated candidate factors. We conduct an analysis in the frequency domain to see how the impacts of the candidate factors on the swap spread differ between different horizons. The sensitivity of the parameters to all possible model specifications has been investigated. Among other things, we find that Treasury- and stock market volatility as well as the activity of the Mortgage Backed Security holders have strong impacts on the US swap spread.

This paper takes a first step in analysing how a monetary union performs in the presence of labour market asymmetries. Differences in wage flexibility, market power and country sizes are allowed for in a setting with both country-specific and aggregate shocks. The implications of asymmetries for both the overall performance of the monetary union and the country-specific situation are analysed. It is shown that asymmetries are not only critical for country-specific performance but also for the overall performance of the monetary union. A striking finding is that aggregate output volatility is not strictly increasing in nominal rigidities but hump-shaped. Moreover, a disproportionate share of the consequences of wage inflexibility may fall on small countries. In the case of country-specific shocks, a country unambiguously benefits in terms of macroeconomic stability by becoming more flexible, while this is not necessarily the case for aggregate shocks. There may thus be a tension between the degree of flexibility considered optimal at the country level and at the aggregate level within the monetary union.

The historical experience from the past 100 years or so indicates that parts of the labour-market structure in Denmark are endogenously dependent on the monetary regime. A credible monetary regime that delivers on the final target of price stability gives a basis for inflation expectations firmly anchored around price stability, which facilitate the use of multiyear nominal wage contracts and a higher degree of decentralised wage formation among forward-looking workers and employers. Lack of credibility of a monetary regime that results in high and volatile inflation makes shorter wage contracts based on centralised wage bargaining more attractive and encourages the use of inflation indexation of nominal wages. If labour-market structures to some extent are endogenously dependent on the monetary regime, results and policy conclusions from theoretical models that treats these part of the economy as exogenous might be questionable.

Balance of payments systems all over the world can roughly be cate-gorised in two – settlement-based systems and survey-based sys-tems such as the Danish. This paper deals with the selection of the Danish survey and the grossing-up estimation. Focus, however, is on the Danish methods of survey maintenance over the medium term insuring both high total survey coverage and broad coverage in terms of instruments and sectors. Many countries with survey-based sys-tems confront similar challenges and the working paper can hopefully be of inspiration and generate discussion.In the Danish system equity, intercompany debt, etc., loans and de-posits, other investments, trade credits and financial derivatives are survey-covered for the sectors non-financial corporations, other fi-nancial intermediaries and insurance and pension funds. Using a dy-namic register on financial account data and simple statistical meth-ods the survey coverage on equity is maintained and the grossing-up is dynamically re-estimated. For intercompany debt, etc., loans and deposits, and other investments a method has been developed to maintain coverage over time while grossing-up is assumed constant. Trade credit coverage and grossing-up is maintained by a very sim-ple method using foreign trade statistics. Derivatives and financial leasing are assumed covered by the survey.

The paper describes the activities of central counterparties (CCPs) and the international framework for those activities. It also provides an overview of the activities of the CCPs in the EU. Against this background, an initial assessment is performed of the possibilities of introducing a CCP in the Danish market. The preliminary conclusion is that there seems to be a limited need for a CCP in the Danish market. Furthermore, the initial costs involved seem to be relatively high. However, a more detailed analysis is recommended concerning the expediency of introducing a CCP on the repo market, where higher risks are involved. Here, the introduction of a CCP would also offer administrative or capital-adequacy benefits. After the publication of the paper, one or more meetings will be held with market representatives with a view to discussing the preliminary conclusions to the paper and the assumptions on which they are based.The paper is also available in Danish.

In this paper we study the transmission mechanism of productivity shocks in a model with rule-of-thumb consumers. In the literature, this financial friction has been studied only with reference to fiscal shocks. We show that the presence of rule-of-thumb consumers is also very helpful in accounting for recent empirical evidence on productivity shocks. Rule-of-thumb agents, together with nominal and real rigidities, play an important role in reproducing the negative response of hours and the delayed responses of output and consumption after a productivity shock.

The paper constructs annual time series for credit to Danish residents by sector and industry 1951-2005 and explores the trends and cycles in credit during the past five decades. There seems to have been a structural shift in the relationship between growth in real credit and economic activity around 1980. In the post-1980 period characterised by increased influence from market forces due to financial liberalisation and internationalisation the swings in real credit growth have been very large relative to the economic growth compared to the pre-1980 period where credit rationing and exchange controls served as important economic-policy instruments. There seems also to have been a shift over time in the short-term cyclical behaviour of commercial credit to the various industries. Real credit were contemporaneous with private sector real GDP in the pre-1980 period but has lagged the business cycle with one year in the post-1980 period. This might reflect the more restricted access to credit in the pre-1980 period. Another possible explanation could be the increased significance of commercial and industrial foundations in the Danish economy.

This paper investigates the real-time effects of foreign exchange intervention using official intraday intervention data provided by the Danish central bank. Denmark is currently pursuing an active intervention policy under the provisions of the Exchange Rate Mechanism (ERM II) and intervenes on a discretionary basis when considered necessary. Prior participation in ERM II is a requirement for adoption of the Euro. Therefore, our study is of particular relevance for the new European Union member states that are either currently participating in ERM II or expected to do so at a later date as well as for Denmark. Our analysis employs the two-step weighted least squares estimation procedure of Andersen, Bollerslev, Diebold and Vega (2003) and an array of robustness tests. We find that intervention exerts a statistically and economically significant influence on exchange rate returns when the direction of intervention is consistent with fundamentals and intervention is carried out during a period of high exchange rate volatility. We also show that the exchange rate does not adjust instantaneously to the unannounced and discretionary interventions under study. We conclude that intervention can be an important short-term policy instrument for exchange rate management.

Utilising a unique data set on monthly private cross-border portfolio gross and net flows to and from Denmark 1984-2004 the paper analyses the short-term relationship between capital flows related to portfolio investments and changes in the Danish nominal krone rate vis-à-vis the euro (D-mark prior to 1999). The main finding is that portfolio investments are important to short-term exchange-rate determination and that the sign of the estimated effect is as expected: Net inflows of capital strengthen the exchange rate. This result is robust to divisions of the data sample into sub-periods as well as to the inclusion of central-bank interventions in the foreign-exchange market and changes in the short-term interest-rate spread vis-à-vis the currency anchor as endogenous explanatory variables. Portfolio flows in Danish bonds appear to be driving the results prior to the introduction of the euro. Since then the main driver has been portfolio investments in foreign shares. Over time there appears to have been a declining effect on the krone-rate from portfolio flows which might be seen as the result of increased credibility of the Danish exchange-rate peg.

Danmarks Nationalbank has in November 2006 started to publish five seasonally adjusted financial time series. The series chosen for seasonal adjustment are monthly series for currency in circulation, the money stock measures M1 and M2 and the MFI sector's lending to households and to non-financial corporations. The purpose of this working paper is to present and document the applied adjustment procedures. The paper is structured as a detailed guide to theoretical considerations and to the practical implementation. The models and the seasonally adjusted data will be subject to annual revisions in accordance with the general revision policy as defined by Statistics.

The paper constructs summary financial-account stock data for Denmark 1875-2005 on an annual frequency and explores the historical monetary and financial trends and cycles on the basis of the new data set. Commercial banks, savings banks and mortgage-credit institutions played a significant credit-supplying role in the Danish economy already during the late 19th century and in the beginning of the twentieth century. A turning point emerged during the early 1930s, and by the middle of the 1950s the ratio of credit to GDP had declined substantially. Since then the trend has reversed but the pre-World War I level was not reached until the decade from the mid-1970s to the mid-1980s. To some extent real asset prices have displayed a similar pattern. There has been a much stronger positive correlation between money and prices at the long-term frequencies (8-40 years cycles) than at the business cycle frequency (2-8 years), but in the post-World War II period prices seem to have lead money at all frequencies. In the period 1875-1945 house prices led credit from mortgage-credit institutions with a considerable lead-time (6 years) in the long-term cycles – in the post World War II period the lead-time has been considerable shorter (1 year). During the whole period 1875-2005 real credit granted by banks and mortgage-credit institutions seems to have been almost contemporaneous with real GDP, and the largest correlation coefficients have occurred in the long-term cycles. The overall conclusion in the paper is that financial accounts are a useful framework for organising and analysing financial data even when data sources are somewhat fragmented and sparse, which is often the case in relation to historical financial statistics.

It is difficult to identify the driving forces behind financial market developments as they are not directly observable. The paper argues that correlations between asset prices in different markets can be used to infer which of five macroeconomic factors that drive markets (growth and inflation in the euro area and the US respectively and global risk appetite). The asset pricing in the model follows standard finance theory, but the resulting indicators are novel. The indicators are useful as they are objective, consistent, based on actual market developments, quantitative and available in real-time. The history of the indicators also passes a “reality check”.

The Working Paper analyses the use of cash in Denmark since 1990 and compares with the development in other EU-countries. The retail cash payments have decreased in the last 10 years, but cash still make up a significant part of the total retail sales. About half of the cash outstanding is held by households for registered transactions, by financial institutions, other companies, public authorities etc. The remaining part of the cash outstanding is supposed to be used for saving or other non-registered purposes. Cash usage in Denmark is approximately the same as in the UK but is lower than the use of cash in the Euro Area. (only in Danish)

The paper examines the past risk and return trade-off on the US bond market, anduses this as a basis for developing a flexible tool based on simulation of principalcomponents to evaluate future prospects for risk and returns for investors. Theprincipal components of the yield curve are related to a few main macro-economicdrivers (inflation and real GDP-gap). This allows simulation of yields curves basedon expectations about the future behaviour of the macro-economic drivers, ratherthan relying solely on parameters estimated from historic data. The overallconclusion is that since 1960 the US-bond market has rewarded risk in the sensethat more volatile bond returns has been associated with higher average realizedreturns. However, this covers very large variation over sub-periods, and in periodswith increasing yield trend extra risk has not always been rewarded. In thesimulations of the future risk-return trade-off, there are lower excess returns fromenhancing the duration exposure in the future relative to the near past. However,the risk associated with duration enhancing is also lower.

This paper provides empirical evidence on the degree of price rigidity and price flexibility in Denmark. Our data relies on unpublished data from Statistics Denmark on the Danish CPI. The dataset covers the period 1997-2005 and contains around 2.7 million monthly price records. The paper reveals a substantial amount of heterogeneity in the frequency and size of price adjustments across sectors and products. Most price changes are increases, but price decreases are not uncommon. Price changes are generally sizeable compared to aggregate and sectoral inflation rates. We explore how these features are affected by e.g. seasonality, changes in indirect taxation and the level of inflation. Our evidence emphasises the importance of price stickiness and supports the existence of both time and state-dependent pricing strategies.

Based on data on the living space of dwellings compiled by Statistics Denmark and data on housing prices compiled by Realkreditraadet (the Association of Danish Mortgage Banks), we calculate three measures of housing wealth for Denmark in the period from 1981 to 2006. These measures include total housing wealth, the housing wealth of households and the value of owner-occupied homes with a breakdown by type of dwelling (detached one-family houses, terraced houses, farmhouses, freehold flats, holiday dwellings and multi-family buildings excluding freehold flats). This paper provides a documentation of methodology and presents results. Moreover, we apply the wealth figures when calculating capital gains on housing and the amount of non-mortgaged housing wealth of households (home-equity). Finally, we discuss alternative housing wealth measures that are publicly available. (only in Danish)

This paper introduces an index that captures risk premiums of euro denominated assets based on sub-indices reflecting various credit spreads, implicit volatilities and bonds' excess return over stocks. The index reflects one common factor that accounts for general shifts in risk premiums across all markets. The development in the index is related to the business cycle, macroeconomic uncertainty and monetary policy. The risk index helps understand underlying market developments and can be applied in investment decisions – when the risk index rises (reflecting higher risk premiums), the level of the German yield curve falls, it becomes more flat and the curvature is reduced. The index also has use in the evaluation of financial stability. For instance, there is a tendency for the risk index to have more extreme tops than troughs, which indicates an asymmetry in investors' returns. Also, the covariation between sub-indices has risen since 1999, thereby indicating an increase in investors' vulnerability.

The paper benchmarks Danmarks Nationalbank against a number of other central banks with respect to operating costs and the number of employees. The management of Danmarks Nationalbank historically has in general taken action at an early stage in the effort to optimise the organisation of the Bank. This has resulted in relative low costs and a lean organisation by international comparison, but it also implies that the scope for further cost reductions probably is smaller than in many other central banks. Staff costs, i.e. mainly salaries, are among the lowest for the central banks included in the assessment, and the lowest among the Nordic countries.

The paper analyses the development in inflation in Denmark during the last century. New time-series data for the underlying domestic inflation in Denmark 1903-2002 is constructed by stripping the development in the private consumption deflator for price increases caused by imports, indirect taxes and gross rents. The stripping builds on an annually updated input-output based decomposition of the private consumption into its direct and indirect content of imports, indirect taxes, rents and other items. The analysis seems to suggest that the input-output based price measure paints a fundamentally different picture of the inflationary development than the private consumption deflator in periods characterised by large structural movements in the relative prices or periods with high inflation volatility. An input-output based measure of the underlying inflation can therefore be a useful supplement to other types of information in studies on the historical inflation trends.

We combine the ideas of the trimmed mean and the Edgeworth index to construct an alternative measure of core inflation named "Trim of Most Volatile Components (TMVC)". At each point of time this measure trims away the components of the price index, which have been most volatile in the past. TMVC tracks trend inflation better than other core inflation measures in the euro zone, but in the US the evidence is weaker.

The impact on central macroeconomic variables from changes in the monetary-policy regime in the OECD countries in the period 1970-2005 is estimated using the difference-in-difference method. We find that both shifts to a fixed-exchange-rate policy and to inflationtargeting have led to a decline in inflation beyond the global trend in the following years. Furthermore, we find a significant reduction in the volatilities in both inflation and output-gap, beyond the global trend, after the adoption of a consistent fixed-exchange-rate policy, while no such effect can be found from a move to inflation targeting. The results are robust to several changes in the classification of the individual countries. In important respects, the results are at odds with recent literature on monetary policy and inflation targeting. This raises some questions: Does the exchange rate in practice absorb or create shocks? Should the role of fiscal policy be reconsidered? Are the concepts of robustness and optimality inadequately mixed? The answers can hopefully be found via future research. Revised December 2007.

The paper presents time series for Danish general government net lending in the period 1875-2003 and analyses the long-term term fiscal development in Denmark. Even though Denmark today has one of the largest public sectors in Europe, relatively speaking, the Danish general government’s deficit has only significantly exceeded 3 per cent of GDP during World War II and in the early 1980s. Furthermore, the cyclical impact on the general government budget balance seems most often to be relatively modest compared to that of discretionary fiscal-policy changes. However, calculations on the cyclical budget volatility also seem to suggest that the cyclically adjusted budget balance has to be in surplus in periods with strong economic growth if the automatic stabilisers should be allowed to work freely during a cyclical downturn without violating a 3-per-cent budget criteria (the reference value in the Maastricht Treaty).

This paper uses records of payments in the Danish large value payment system to compute a unique, high-frequency data set on bilateral exposures between banks. The risk of contagion in the Danish interbank market is subsequently analysed using this data set. It is found that the risk of financial contagion due to an unexpected failure of a major bank is very limited. This applies even when banks are assumed to loose all their exposure, i.e. a loss given default of 100 per cent. Where contagion is identified, it affects only smaller banks and no further knock-on effects are found.

This paper illustrates the consequences on the calculated capital requirements of pooling data from several countries for estimation of probability of defaults when using the foundation internal ratings-based approach in Basel II. We construct a hypothetical bank portfolio of loans to small and medium-sized enterprises in France, Italy and Spain based on real world data extracted from the Amadeus database provided by Bureau van Dijk. The calculated capital requirements using probability of defaults estimated in single-country credit scoring models and multi-country credit scoring models shows that banks might be motivated to choose a certain method because it results in a lower capital requirement (cherry-picking), when they pool data.

In the paper a non-standard comparison of two hazard models with differently specified hazard functions is made: one with a logit specification and the other with a probit specification. The estimations assume that if two firms have identical values of the covariates, they also have identical hazard functions, that is, unobserved heterogeneity is assumed away. The presence of unobserved heterogeneity can cause several problems, therefore, as a specification check, the hazard functions are extended to also include unobserved heterogeneity. In addition to investigating the various specifications of the hazard function, the paper discusses the treatment in the literature of different types of exits. The conclusions in the article are the following: Firstly, there does not seem to be any major difference between the logit and the probit specification. Secondly, unobserved heterogeneity seems to be unimportant, probably because a number of proxies are used for inherently unobservable variables. Thirdly, the results differ depending on the event, which is modelled (financial distress versus pooled exits). This is the case for the estimated parameters as well as the predictive abilities of the models, no matter whether the specification for the hazard functions is the logit or the probit specification. The practical implication of the paper is that it is important to think careful about the specification of credit-scoring models.

The determinants of corporate failure in Italian, Spanish and French small and medium-sized enterprises are investigated in order to find out whether the predictors of financial distress in the countries are the same or not. In order to compare the determinants of financial distress, accounting-based credit-scoring models for each country are estimated. The analysis uses a data set provided by Bureau van Dijk. The great virtue of the data set is that it enables us to make cross-country comparisons. On the negative side it should be mentioned that the data set, when looking at each country individually, is not as good as some of the data sets used in the individual country studies (in the sense that a number of firms drop out of the panel with no explanation).The comparison of the significance and sign of the determinants of financial distress in the three countries shows, that although there are some similarities across countries, there are also quite a lot of differences. Some of the variables that behave similarly across countries are the earnings ratio and the solvency ratio. The variables, whose effect differs between the countries in terms of whether or not they are significant or what sign they have, are the loans to total assets ratio, size, age, legal form and a variable, which measures the concentration of ownership.Apart from the individual credit-scoring models a model including all countries is estimated. As valid estimates of the probability of default for individual banks require a considerable amount of data, Basel II allows for banks to pool their data with other banks in order to overcome their data shortcomings. In this way a number of international data pooling projects have emerged, where banks from various countries pool their data. Because of this development and as, furthermore, many credit institutions in Europe have cross-border activities, the choice between setting up individual country credit-scoring models or a common credit-scoring model is relevant, when calculating capital requirements for banks. The comparison of the significance and sign of the parameter estimates and the predictive ability of the individual country credit-scoring models and the pooled model show that the pooled model delivers results that differ to quite an extent from the individual country credit-scoring models.There are few studies, which do compare the determinants of financial distress across countries. To the best of our knowledge, this is the first comparative accounting-based credit-rating study of a fairly homogenous group of countries, and so it fills a gap in the literature.

Danish business cycles from 1974 to 2000 are studied. The HP-filter and the Baxter-king filter are applied and several empirical regularities are identified: Consumption tends to lead the business cycle while investment, especially construction, follows with a lag. Export does not covariate systematically with activity, but high activity is followed by a low market share, indicating a domestic capacity effect. Prices are in general found to be counter cyclical, reflecting i.a. a long lag in the price impact of demand shocks. Demand shocks seem to impact prices mainly via the labour market rather than pulling prices directly. It is also established that real interest rates based on realised inflation have little co-variation with activity and it is suggested to use a real interest rate based on filtered inflation instead. Rolling 10-year sample periods are used to check all results for robustness over time.

This Working Paper compares the Danish financial system with that of the Euro area countries using three different analytical approaches. The structure of the financial system is analyzed showing who saves, how the savings are processed to the users, and who the users of capital are. The integration of the Danish financial system with that of the Euro area is tested using – among different approaches - "The law of one price". Finally, the framework for the development of the financial system is compared. It is concluded that the Danish financial system has many common characteristics with that of the Euro area countries. In despite of the similarities there is some way to go before exactly the same retail products are marketed within all countries in the Euro area and in Denmark. To quote a colleague, there is some way to the level in the fast-food business, which is why the McLoan and McDeposit ain't there yet. This paper is only available in Danish.

The paper paints a broad picture of the interest-rate development in Denmark since 1875. Three different short-term interest-rate series (the official discount rate, private banks’ average deposit rate, and the market rate of discount/money market rate) and two different long-term interest-rate series (government bond yield and yield on mortgage-credit bonds) are constructed. The “stylised facts” of the development in real interest rates and inflation expectations in Denmark are presented, and comparisons are made with the development in Germany, the UK, the USA, Norway and Sweden.

This paper is meant to provide a general overview of the subject of offshore outsourcing in America. The debate over offshore outsourcing has been triggered by the increasing trade deficit and steep decline in manufacturing employment over the latest business cycle. Furthermore, as technological advances allow for service functions to relocate abroad, a larger segment of workers are now faced with international competition. Most studies find that the current level of offshore outsourcing of services is benign compared to the net job creation in America. Estimates show that in the longer run, as many as 14 million service jobs are in danger. In manufacturing, still more areas are being affected by foreign competition. The offshore outsourcing of jobs and functions increases productivity and has a tendency to increase demand for higher-skilled labour. It also lowers prices particularly benefiting lower-income families. On an aggregate basis, it provides America with a net gain. However, there is a growing concern that offshore outsourcing does not only imply transitional costs as the economy undergoes structural change, but that it creates a permanent downwards pressure on wages for many groups in competition with cheaper labour overseas. This entails more focus on the needs for adult training and education.Free world trade remains a precondition for globalisation and the exploitation of international division of labour. At both federal and state level of government, there is a trend towards more protectionism. The Chinese peg to the dollar and the opening of overseas markets for American goods and services have taken centre-stage.

This paper describes how the two most important clearing and settlement systems in Denmark, VPand the Sumclearing, work in practice. Further it analyses, how the legal framework in theSecurities Trading Act, STA, based on directive 98/26/EC on settlement finality in payment andsecurities settlement systems works in relation to the functionality of VP and the Sumclearing. Thefunctionality for both systems encompasses net settlement (multilateral netting).

This paper investigates the money demand in Denmark in the period 1980-2002 using quarterly data. Within the framework of a cointegrated vector autoregression model an empirical long-run money demand relation is identified and analysed.

The primary goal of this paper is to make a tool that can assist the regular analyses of the non-financial sector, namely to make a model that is able to predict the firms that end up in financial distress.

This paper presents an accounting-based model developed in Danmarks Nationalbank to predict failure rates in the Danish corporate sector. The model serves as a tool in analysing the Danish corporate sector in relation to financial stability. The main purpose is to assess the banks' credit risk on the corporate sector. By using logistic regression the model is estimated on 300,000 accounts of the Danish corporate sector published in the period from 1995 to 1999. Nine indicators from the accounts, including more qualitative information about the company, are significant in predicting the failure rates of Danish companies. Besides the basic model, models at sector level and by number of employees in the company are estimated.

The paper reviews the empirical evidence regarding long-run relative purchasing-powerparity (PPP) convergence in the case of Denmark using simple unit-root tests and cointegration tests on new historical time-series indices for the effective krone rate since1875. The results based on a real effective krone rate index with wholesale prices as deflators support a hypothesis of long-run relative PPP convergence.

This paper constructs annual trade-weighted nominal and real effective exchange rate indices for Denmark covering the period since the introduction of the krone as the Danish currency unit in 1875. Two real effective krone rate indices with respectively wholesale prices and consumer prices used as deflators are calculated.

Based on the equilibrium correction structure of a cointegrated vector autoregression it is rejected that US monetary policy 1988-2002 can be described by a traditional Taylor (1993) rule. Instead we find a stable long-term relationship between the Federal funds rate, the unemployment rate, and the long-term interest rate, with deviations from the long-term relation being corrected primarily via changes in Federal funds rate. This is taken as an indication that the FOMC sets interest rates with a view to activity and to expected inflation and other conditions available in financial markets.

Many financial institutions voluntarily undertake additional interest rate exposure, due to their short-term funding and the placements of their assets in longer term bonds. Based on realised total bond returns of the major bond markets this paper assesses whether a fixed-income investor is actually rewarded by taking this additional interest rate risk. Unfortunately, the question raised in the title of this article can not clearly be anwered. The outcome of the empirical analysis has shown that returns, return volatilities and their correlations are time-varying. However, some investment policy implications and conclusions can be stated, but caution is warranted when interpreting the empirical findings.

Following Shimko (1993), a large amount of research has evolved around the problem of extracting risk neutral densities from options prices by interpolating the Black-Scholes implied volatility smile. Some of the methods recently proposed use variants of the cubic spline. These methods produce non-differentiable probability densities. We argue that this is an undesirable feature, and suggest circumventing the problem by fitting a smoothing spline of higher order polynomials. We apply this technique to the LIFFE three-month Euribor futures option prices. Summary statistics from constant horizon risk neutral densities are calculated and used to assess market uncertainty on a day-by-day basis. Finally, we analyse the impact of the 11 September attacks on the expectation of future Euribor interest rates.

Central banks have become increasingly worried about systemic risks to the financial market and infrastructure stemming from payment systems. Failure to settle by a participant in a netting system can potentially jeopardize the settlement of other participants. The fear of a systemic crisis has been one of the primary motivations for the introduction of Real Time Gross Settlement systems around the world. This paper provides an assessment of the systemic risk inherent in the Danish interbank netting system. In accordance with similar empirical studies conducted in other European countries, the risk is found to be low.

This paper develops a model of endogenous exchange rate pass-through within an open economy macroeconomic framework, where both pass-through and the exchange rate are simultaneously determined, and interact with one another. Pass-through is endogenous because firms choose the currency in which they set their export prices. There is a unique equilibrium rate of pass-through under the condition that exchange rate volatility rises as the degree of pass-through falls. We show that the relationship between exchange rate volatility and economic structure may be substantially affected by the presence of endogenous pass-through. Our key results show that pass-through is related to the relative stability of monetary policy. Countries with relatively low volatility of money growth will have relatively low rates of exchange rate pass-through, while countries with relatively high volatility of money growth will have relatively high pass-through rates.

For empirical purposes it is suggested to approximate the real interest rate gap by a simple transformation of the difference between two nominal interest rates, the central bank's policy rate and the long-term interest rate. The latter contains information on inflationary expectations and expected real returns from other assets. The suggested measure is used for an empirical analysis of recent monetary policy in a few countries and some new, although preliminary interpretations are obtained, in particular concerning the US and Sweden. In addition, arguments are put forward to include the measure in the analyses under the first pillar of the ECB. The measure is readily available in real time.

Empirical evidence documents substantial persistence in the adjustment process to nominal shocks. Existing open-economy models have failed either to generate interesting dynamics or found that the mechanisms are quantitatively weak. We consider the propagation of nominal shocks in a fully specified stochastic intertemporal open-economy model with incomplete capital markets and staggered nominal wage contracts.

The present paper offers a careful description of empirical identification of possible multiple changes in regime. We apply recently developed tools designed to select between regime-switching models among a broad class of linear and nonlinear regression models and provide a discussion of the impact on the formation of inflation expectations in the presence of multiple and recurrent changes in inflation regimes.

The paper develops a simple stochastic new open macroeconomic model in which price-setting firms' choice between producer currency pricing and local currency pricing is endogenous. We show that, in equilibrium, firms will denominate their export price contracts in the currency of the country with the lowest level of monetary variability. A welfare maximising government's choice of exchange rate regime is also analysed, and we find that a fixed exchange rate is preferable if the domestic monetary variability is higher than the foreign one.

We use a game theoretical framework to analyze the intraday behaviour of banks with respect to settlement of interbank claims in a real time gross settlement setting. We find that the game played by banks depends upon the intraday credit policy of the central bank and that it encompasses two well-known game theoretical paradigms: the prisoner's dilemma and the stag hunt. The former arises in a collateralized credit regime where we confirm the result of earlier literature that banks have an incentive to postpone payments when daylight liquidity is costly and that this is socially efficient. The latter arises in a priced credit regime where we show that the postponement of payments can be socially efficient.

Ignoring items with large price changes may enhance the informational content of a price index. As an application of the metrically trimmed mean (Kim, 1992) we suggest to discard the individual price changes that deviate the most from the median. Focusing on outliers increases the efficiency compared to always trimming equally in both tails and the implied bias problem seems small. The distribution of price changes is often skewed strongly to the right or to the left in a specific month but is much closer to symmetric for a longer period as a whole. This is also the case with Danish data analyzed in this paper. The suggested metrically trimmed mean gives a measure of expected inflation, which may help representing inflation in economic analyses.